3 Explanation of options Futures vs. options Unconditional Derivative market Conditional Futures Options (Call / Put) Buyer (long) Seller (short) Buyer (long) Seller (short) has to pay at expiration has to deliver at expiration can exercise (buy or sell) has to fulfill if the buyer exercises (deliver or take) No payments on the trading day Imbalance of rights is equalized by the payment of an option premium Copyright 2015 All rights reserved Page 3

4 Explanation of options Possible option positions Option Call (Buy option) Put (Sell option) Long (Buy Call) Short (Sell Call) Long (Buy Put) Short (Sell Put) Right to buy at strike price has to deliver at strike price in case of being exercised Right to sell at strike price Has to take at strike price In case of being exerised First step (buy or sell) = Opening ; Second step (buy or sell) = Closing i.e. If you sell an option first and then buy it back: 1. Sell to Open 2. Buy to Close Copyright 2015 All rights reserved Page 4

6 Option products on EEX Options at EEX Option types by underlying Options on spot market products: Underlying is a spot market product that will be delivered and paid Options on Futures: Underlying is a Future that will be delivered long/short Option on Index: Cash settlement of the difference between the strike price and the index price Option types by exercise style European Option: Exercise only on the last trading day possible American Option: Exercise is possible on every day of the options life time Asian Option: Payout value depends on average price of underlying during a defined period Option types by payment Future styled: deviation of the premium is equalized via variation margin only Traditionally styled: Premium has to be fully paid one day after trading Copyright 2015 All rights reserved Page 6

12 Option products on EEX Exercise Date Underlying Dec YY Cal YY+1 Mar YY Jun YY Sep YY Dec YY Cal YY+1 Beside the general options for the Year Baseload Future, which expire at the 2nd Thursday in December there are also options with earlier expiry dates available. They are all fulfilled with the same Future contract. Expiration of short dated options equals the expiry dates of quarter options Copyright 2015 All rights reserved Page 12

14 Option products on EEX Options can be manually exercised until 3:00 pm on the last trading day Exchange Member Long positions Exercise Assignment Short positions Exchange Member exercised, even if they are out of the money A 1L 1S C not exercised, even if they are in the money partially exercised Allocation via random selection in case of partial exercise: All exercised and assigned Options are fulfilled through the booking of Futures, and all non-exercised Option positions will expire. Automatic exercise is possible as a percentage or absolutely B 9L 3S 5S 1S D E F Long Position in the Option (Buyer) Call Option is exercised by the buyer < 3:00 pm a Long Position in the Future and leads to registration of a Short Position in the Future Put Option is exercised by the buyer < 3:00 pm and leads to registration of Short Position in the Option (Seller) a Short Position in the Future a Long Position in the Future Copyright 2015 All rights reserved Page 14

15 Margin calculation Premium margin: Current value of position to be closed at settlement price Long positions reduce the margin requirement of short positions Additional margin: Covering the risk of an option price change during the next trading day (overnight risk) Different contracts can offset their single margin requirement, only upside or downside risk is taken (the higher one) Maximum netting of all products long positions in options cause margin reductions but no positive margin Copyright 2015 All rights reserved Page 15

16 Margin calculation Option price Settlement Price day 2 Settlement Price day 1 Trade price Range of possible price changes of the option Additional Margin Premium Margin time Trading day t End of day t+1 End of day t+2 End of day t+3 Copyright 2015 All rights reserved Page 16

18 Advantages of using options Long positions: only participation in positive direction, in negative direction only the premium can be lost, insurance-like. Short positions: Opportunity to use options as limited orders and gain money Optimal participation on certain market price development by the opportunity of combining different options Trading time and volatility strategies, Delta hedging, very liquid underlying Cheaper way to trade futures due to EEX fee structure, no exercise fees Automatic exercise available No variation margin, no margining for long positions at all, margin effects different to futures, Full cross margining with all other ECC cleared assets Products are EMIR compliant Copyright 2015 All rights reserved Page 18

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